What do I need to know about recordkeeping?
The rules for the records required to prove income and deductions are not the same.


The tax rules consider income to be considered taxable until proven otherwise.
Examples of deposits into your bank account that aren't taxable:
  • Loans
  • Wages from a job
  • Cash advances on credit cards 
  • Transfers from one bank account to another
You must be able to prove that these are not taxable with documentation such as:

  • Loan agreements
  • Paycheck stubs
  • Credit card statements or bank statements

Unlike income, you must be able prove that they are related to your business with documentation, for example:
  • Invoices
  • Bills
  • Cancelled checks
  • Credit and debit card receipts
  • Handwritten records of cash expenditures.
Organizing your expense records

You can use any bookkeeping system you choose as long as it clearly shows the transactions that make up the total amount you deduct for each expense category.

Even if you must use what I call the pile method for organizing your receipts, make sure you keep your piles together! 

What is the pile method? It's where you put receipts into a box all during the year. At tax time you dump them out on a table and put them into piles (i.e. categories). Then you add up the amounts in each pile and enter them on your tax return or give them to your tax preparer.

Important: Be sure you have proof of how you arrived at the total amount for each pile. A paper tape from an adding machine is ideal for this. A cellphone calculator is not.

Warning: The reports created by bookkeeping software and manually-prepared records are not proof that you spent your money on business-related things. They only prove which transactions you put into each expense category and how you determined the total for each category.